In War, Always Leave The Enemy One Exit

I want to get off a quick note this afternoon regarding the domestic telecoms, primarily AT&T $T and Verizon $VZ.  First, a quick review of the charts:

As you can see, both charts speak volumes as to both how poor these companies have executed on a fundamental basis and just how ostracized they have been by market participants who are looking for bigger dividends and or stronger growth.  Plainly said, they have not participated in the rally to any extent what so ever.

The fundamental outlook for these two giants is not good given that the US market for cellular phones is just about completely saturated.  They were hoping that fees from data subscriptions would cover what they were losing in pricing power for voice, but as we’ve seen with the iPad release and the 30$ all you can eat data plan, that’s pretty much gone out the window.  How about taking a piece of the growing revenue from third party applications downloaded on their phones.  Ummmm, doesn’t seem to me that Apple $AAPL is sharing any of that, nor is $GOOG with their android devices.  So where is the growth from these guys?  They’ve been relegated to being a dumb pipe, they are now just the infrastructure upon which the real money makers operate, and believe me, they’re not happy about it.

A main tenet of warfare is to always leave your adversary at least one way out, if you’re smart you construct the path to which you’d like them to exit in order to benefit from the direction they retreat.  Why is this a smart move, because an enemy with no way out and little hope of survival can be a very dangerous warrior.  They may chose to sacrifice themselves just to harm you, exacting a brutal tole on you in your quest for victory.

So how does this fit in with the telecoms?  The “we have no way out so fuck you” approach may have already started.  Verizon has already been resistance to putting the Apple iPhone on its platform for fear that it will use tremendous amounts of data without sharing any of the third party application profits with the carrier.  Now they are beginning to play games with Google saying that they won’t pick up the Nexus One which was planned to be released spring of 2010.  Google loses access to the carrier’s more than 90 million users and seems to have stumbled for the time being in becoming a major player in the mobile handset market.

AT&T has not picked up the phone either.  But AT&T has more problems than just Google to be sure, they are trapped in a mutually hated relationship with Apple now where neither party can get rid of each other, it really is the marriage from hell.  Apple doesn’t have another carrier, and AT&T can’t throw Apple off for fear that its massive amount of iPhone users will defect from its completely inferior network.  So AT&T is trapped having to provide Apple with more and more bandwidth, towers, and other infrastructure as the public and media scream at AT&T to get their network up to Verizon’s standards, not to even mention how well Sprint $S works.  $T is for sure frustrated that they have to make these capital expenditures and see no increased profit from them, it’s like bailing out the water from a ship with a 20 foot hole in the bottom, you’re just spending energy trying to stay afloat.

Something has to give here, this can’t go on forever, and I think we are soon to see a resolution to the issue of the telecom giants paying for the network on which Apple and Google make tremendous amounts of money.  Maybe the telecoms chose the nuclear option and just stop building their networks holding Apple’s feet to the fire.  Steve Jobs can’t revolutionize the content distribution market without a network to do it on, and believe me, the stuff that he wants to do is going to take a lot more bandwidth than is available today.  Do we really think the carriers are going to pay for that to happen.  Maybe Apple buys a carrier, or even builds its own network with a next generation technology they have been developing.

One thing is for sure, Apple and Google haven’t left the carriers at exit and that makes them dangerous.  As well, I highly doubt Steve Jobs is going to leave the future of Apple up to the idiots at the telecom giants who have utterly failed to innovate.  It will be an interesting soap opera for sure, stay tuned.

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